Which stock, A or B, or both of them, is preferable to add to the diversified portfolio, and why? if the information about each stock as follows:

stock A: Average annual return-117.4, Average return 11.7%, Standard deviation 8.9, Coefficient of variation 0.8, Required return 11.8, beta 1.6

stock B: Average annual return-111.4, Average return 11.1%, Standard deviation 2.7, Coefficient of variation 0.2, Required return 10.3, beta 1.1

Risk free rate 7%

Market return 10%

Covariance 11.95

Correlation coefficient 0.48

Return on a portfolio (with both stocks A and B) 11.44

Standard deviation of a portfolio 5.26

3

. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an

expected return of 18% and a standard deviation of return of 20%. Stock B has an expected

return of 14% and a standard deviation of return of 5%. The correlation coefficient between the

returns of A and B is 0.25. The risk free rate of return is 10%.

What proportion of the optimal risky portfolio should be invested in stock? (please no answers in excel, only typed out)

Respond to the following scenario: A prospective client comes into your office looking for investment advice. The client feels that she or he is appropriately diversified because the portfolio currently holds six different growth mutual funds, hence a large variety of equity securities.

a. Is this diversification?

b. How would you measure diversification between funds?

c. If this prospective client was 32 years old, and the funds in question were part of retirement savings, what would you advise the client regarding having an adequately diversified mutual fund portfolio?

You are evaluating two different silicon wafer milling machines. The Techron I costs $297,000, has a three-year life, and has pretax operating costs of $82,000 per year. The Techron II costs $515,000, has a five-year life, and has pretax operating costs of $55,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $59,000. If your tax rate is 23 percent and your discount rate is 11 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Techron I

Techron II

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $332,233 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 15%.

What is the NPV if the company decides to wait 2 years to purchases the machine? (Round answer to 2 decimal places. Do not round intermediate calculations)

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $326,094 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 16%.

What is the NPV if the company purchases the machine today? (Round answer to 2 decimal places. Do not round intermediate calculations)

White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.

a. Calculate the NPV at the following discount rates and plot an NPV profile for this​ investment: 0​%, 5​%, 7.5​%,10​%,15%​,20​%,22.5​%,25​%,30​%.

b. What does the NPV profile tell you about this​ investment's IRR?

c. If the company follows the IRR decision rule and their cost of capital is 15​%, should they accept or reject the​ opportunity? Why is it hard to make a decision on this investment based solely on the IRR​ rule?

d. If the​ company's cost of capital is 15​%, should they reject or accept the investment based on its​ NPV?

What is the "opening price point"? how is it used to increase sales at Walmart?

The interest rate is 8%.

When you are 30, you want to deposit $X in your retirement account so that when you retire in 35 years you can withdraw $100,000 every year for 20 years (first withdrawal is at year 36).

How much is X?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.4%. The probability distributions of the risky funds are:

The correlation between the fund returns is .0684.

A) Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL. -What is the standard deviation of your portfolio?

B) What is the proportion invested in the T-bill fund?

C) What is the proportion invested in each of the two risky funds?

Stock %

Bonds %

7. Constant-growth rates

One of the most important components of stock valuation is a firm’s estimated growth rate. Financial statements provide the information needed to estimate the growth rate.

Consider this case:

Robert Gillman, an equity research analyst at Gillman Advisors, believes in efficient markets. He has been following the mining industry for the past 10 years and needs to determine the constant-growth rate that he should use while valuing Pan Asia Mining Co.

Robert has the following information available:

Based on this information, Robert’s forecast of PAMC’s growth rate in earnings and dividends should be:

8.15%

27.16%

28.75%

7.35%

Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?

Growth in earnings requires growth in dividends.

Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company.

Retaining a higher percentage of earnings will result in a higher growth rate.

Financial Calculator Inputs please

1. If the variance of ONLY one asset in a two-asset portfolio changes, what other metric changes?
   1. Weight of the asset whose variance changes
   2. Covariance between the two assets in the portfolio
   3. Variance of the other asset
   4. All of the above
   5. None of the above

2. Given the following calculate the geometric mean yield for the entire holding period:

1. 7.2%
2. 7.3%
3. 7.4%
4. 7.5%
5. 0%

3. Using the information below, calculate the expected return:

1. 17.2%
2. -2.2%
3. 17.4%
4. -2.5%
5. 17.6%

4. Which of the following would cause the Security Market Line to pivot upward:

1. A pharmaceutical company receives FDA approval for a new drug
2. Real growth rate of the economy declines
3. The expected rate of inflation increases
4. All of the above
5. None of the above

5. Given the following, calculate the covariance of returns for these two assets:

1. 0.01%
2. 0%
3. -0.01%
4. 0.05%
5. -0.05%

6. Calculate the standard deviation of a portfolio comprised of the following two assets that have a correlation coefficient of 0.5:

1. 2.8%
2. 2.9%
3. 3.0%
4. 3.1%
5. -2.2%

7. Suppose the standard deviations of each asset increases by 30% of their original values but the correlation coefficient does not change. What happens to the portfolio standard deviation?
   1. It also increases by 30%
   2. It increases by more than 30%
   3. It increases by less than 30%
   4. It decreases by 30%
   5. I don’t know, but this class is awesome!

8. What is the efficient frontier?
   1. The set of portfolios the represent the best combination of risk and return
   2. The set of portfolios that dominate all other portfolios
   3. The set of portfolios from the MVP to the maximum-risk portfolio
   4. All of the above
   5. None of the above

9. Which is not included in the efficient frontier?
   1. Stocks
   2. Bonds
   3. Real Estate
   4. The risk-free asset
   5. Artwork

2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company has 200,000 bonds outstanding. The bonds have a 6.4% coupon (paid semi-annually) and their par value is $1,000. The common stock currently sells for $35 per share and has a beta of 1.20. The bonds have 10 years until maturity, and sell for 105% of par. The market risk premium is 7%, the risk-free rate is 2%, and the company’s tax rate is 40%.

a) What is the current market value of the company?

b) If the company is evaluating a new investment project that has the same risk as the company’s typical project, what rate should the firm use to discount the project’s cash flows?

c) Assume the company adjusts its capital structure and now has no debt (i.e. the company is all equity financed). What is the company’s stock beta?

Why do we want portfolios on efficient frontier (EF) rather than the portfolios on the lower part of the portfolio possibilities curve (PPC)?